LVR occurs when cryptocurrency prices fluctuate continuously offchain but update periodically onchain, leading to arbitrage opportunities that cause liquidity providers to transact at outdated prices, representing an opportunity cost. Solutions include order-flow auctions, like those used by CoW AMM, which auction the right to arbitrage and align onchain prices with offchain prices, though participation is limited. Another solution is dynamic fees for AMMs, adjusting trading fees based on market data to potentially increase LP returns, with targeted approaches involving higher fees for toxic order flow. Despite these strategies, LVR-focused AMMs have struggled to gain significant market share, with CoW AMM and Ambient together accounting for less than 1% of Uniswap's volume, raising concerns about their long-term viability and the ability of dynamic fee AMMs to create a competitive advantage.
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